Sustainability or growth?
Article Date: Jan 11 2007When seeking to develop your business empire, a choice often needs to be made between following the more stable route of sustainability or aggressively seeking to grow. Michael Jackson*, chairman of Elderstreet Investments, weighs up how to ensure your approach to expansion is the right one.
They say comparisons are odious, but how many of us who are shareholders in companies don’t spend time comparing our company value with another from our peer group? It’s only natural.
Of course, comparisons are easier to do when your company is quoted on a public market. But for those of us who consult advisers because we have thoughts on selling our company in the future, comparisons to our peer group is still the most used metric.
The problem, however, is that your ‘M&A’ adviser may tell you that the reason you’re not as valuable as Company A is because you do not have real visibility on where your future sales are coming from (ie. a lack of sustainability), or that Company A is growing at an attractive X per cent per annum and you are only growing at Y!
Now you might say that you can have both – growth and sustainability – but this is rare and comes with real pain in the early years. You see, if you can develop a business model that’s subscription or annuity based, once you have reached critical mass (so, for example, your costs are covered by your income), the rest just falls to the bottom line (this is always assuming you don’t have high ‘churn’ or ‘erosion’ in your existing customer base!).
The dilemma is that to get ‘sticky’ customers is often labour and capital intensive (and expensive), plus you only get a small part back in year one.
Cash-flow issues
As well as affecting top line growth, it has significant implications on a businesses cash flow in many different ways. For example, commission paid to salespeople may have to be based on the total value of a long-term contract upfront (in order to keep your top sales people happy!) even though the cash is spread over many months or even years.
At Elderstreet, my venture capital fund manager, we have a capital intensive vending machine business. Critical mass has been reached and we now have real sustainable income; getting to this point needed lots of equity which, in turn, was expensive in terms of dilution to management.
Sustainability has my vote as a conservative accountant and the market likes it, as witnessed by the success of companies in sectors like managed IT services, certain financial companies, banks and insurance and any company that has a high degree of maintenance income from existing users (a perfect example is accounting and payroll software behemoth Sage).
Now in case you think I am turning soft, I could put an equally compelling argument forward for emphasis on growth that trumps a business model set up to drive sustainable sales.
